Far from clear bailout for Ireland would calm matters elsewhere

 

ANALYSIS:Resort to the EU-IMF fund could easily exacerbate the euro-zone crisis

HOW CAN Europe’s government debt crisis be calmed and the threat to the very existence of the euro banished? The search for answers to this question, which has been propelled to the top of the agenda across the Continent in recent weeks, intensified over the weekend.

Officials in some EU capitals and in some of the bloc’s institutions let it be known in recent days that they believed Ireland should pre-emptively tap the EU-IMF bailout fund. To do so, they believe, would be the best available means of killing contagion and restoring calm.

Their rationale is that Ireland could be removed as a source of instability for the rest of the euro zone if it accepted help and ended its dependence on the capricious bond market for its borrowing needs over the coming years. The airing of these views led to a blizzard of speculation that Ireland would be frogmarched to the bailout fund as early as last night. That didn’t happen for a number of reasons. First, the Government fiercely opposes doing so, not least because it doesn’t have to. As any Government politician or official will say given half a chance, there is enough cash on hand not to have to borrow from anyone until the middle of next year. And if the pension reserve fund were to be liquidated, that time horizon could stretch to early 2012.

Another reason that the white flag is not about to be run up is because it is far from clear that a bailout for Ireland would calm matters for everyone else.

Recall that it was after Greece formally requested a bailout in April that the debt crisis exploded so violently, leading ultimately to the agreement in the early hours of May 10th to set up the massive €750 billion EU-IMF fund.

The very existence of the fund was designed to calm government bond investors that they would get their money back if other weaker countries went the way of Greece. (That has clearly failed, as confidence in Ireland and, to a lesser extent, Portugal has evaporated in recent weeks.)

Those who argue for pre-emptive action now do so because they believe the Greek crisis could have been contained if it had been tackled earlier. The decision in principle to bail out Greece was made in early February, but indecision and divisions led to delay. This hesitation was almost fatal for the euro. But dithering then was different. It had become inevitable as early as February that Greece would require help. It is probable but not inevitable that Ireland will need help. There is still a chance the country can fight its way back to solid solvent ground unaided.

The pre-emption brigade also downplay the risks of precipitate action – resort to the bailout fund by Ireland now could easily exacerbate the euro-zone crisis.

In the aftermath of a lifeline being thrown to Ireland it is not difficult to envisage market focus turning to Portugal. It does not have the cash cushion Ireland has. As such, it continues to need to issue new bonds frequently. If it cannot do that, it too will be obliged to tap the fund.

The next weakest country is Spain. Its economy is bigger than those of Ireland, Greece and Portugal combined. Bailing it out would exhaust the €750 billion fund.

The three minnows and Spain can be supported by the other 12 euro-zone participants. But Italy, the next weakest country, is probably too big to save. If it wobbled on the brink, the euro’s existence would be in question.

Thankfully, Europe remains a considerable distance from that point. But such is the fragility of the situation that each day is a hold-your-breath day. This morning, markets could tank in reaction to the speculation about a forced bailout for Ireland and the foolish musings of Portugal’s foreign minister – he talked about his country’s possible withdrawal from the euro. By the time euro-zone ministers meet in Brussels on Tuesday, all hell might have broken loose. It is also possible – if less so – that traders will brush off the weekend’s brouhaha. Either way, don’t expect to breathe a sigh of relief soon. Getting out of the worst crisis since Europeans created their union a half-century ago will involve long slog, frequent scares and possibly worse.